Netgear 2012 Annual Report Download - page 23

Table of Contents
If we fail to successfully overcome the challenges associated with managing and profitably growing our broadband service provider sales
channel, our net revenue and gross profit will be negatively impacted.
We sell a substantial portion of our products through broadband service providers worldwide. Our service provider business unit accounted for
a significant portion of our growth in 2011 and throughout 2012. Our service provider business is increasingly becoming a larger proportion of our
business, especially upon the contemplated closing of the acquisition of the Sierra Wireless AirCard business. The service provider business is
challenging and exceptionally competitive. We face a number of challenges associated with penetrating, marketing and selling to the broadband
service provider channel that differ from what we have traditionally faced with the other channels. Difficulties and challenges in selling to service
providers include a longer sales cycle, more stringent product testing and validation requirements, a higher level of customization demands,
requirements that suppliers take on a larger share of the risk with respect to contractual business terms, competition from established suppliers,
pricing pressure resulting in lower gross margins, and irregular and unpredictable ordering habits. For example, even if we have a product which a
service provider customer may wish to purchase, we may choose not to supply products to the potential service provider customer if the contract
requirements, such as service level requirements, penalties, and liability provisions, are too onerous. Accordingly, our business may be harmed and
our revenues may be reduced. Further, successful engagements with service provider customers requires a constant analysis of technology trends. If
we are unable to anticipate technology trends and service provider customer product needs, and to allocate research and resources to the right
projects, we may not be successful in continuing to sell products to service provider customers. In addition, because our service providers command
significant resources, including for software support, and demand extremely competitive pricing, our ODM's are starting to refuse to engage on
service provider terms. Accordingly, as our ODM's increasingly decline to take orders for manufacturing our service provider products, our service
provider business will be harmed.
Further, as the deployment of DOCSIS 3.0 technology by broadband service providers continues to mature, we anticipate competing in an
extremely price sensitive market and our margins may be affected. Orders from service providers generally tend to be large but sporadic, which
causes our revenues from them to fluctuate and challenges our ability to accurately forecast demand from them. In particular, managing inventory
and production of our products for our service provider customers is a challenge. Many of our service provider customers have irregular purchasing
requirements. These customers may decide to cancel orders for customized products specific to that customer, and we may not be able to reconfigure
and sell those products in other channels. In addition, these customers may issue unforecasted orders for products which we may not be able to
produce in a timely manner and as such, we may not be able to accept and deliver on such unforecasted orders. In certain cases, we may commit to
fixed-
price, long term purchase orders, with such orders priced in foreign currencies which could lose value over time in the event of adverse changes
in foreign exchange rates. Even if we are selected as a supplier, typically a service provider will also designate a second source supplier, which over
time will reduce the aggregate orders that we receive from that service provider. For example, we have been at the forefront of developing and selling
DOCSIS 3.0 products to our service provider customers in the past couple of years. As our competitors develop DOCSIS 3.0 products, our service
provider customers may use these competitor products as an alternate source for this technology. Our service provider customers may then require us
to lower our prices or they may choose to purchase more DOCSIS 3.0 products from our competitors. Accordingly, our business may be harmed and
our revenues may be reduced.
If we were to lose a service provider customer for any reason, we may experience a material and immediate reduction in forecasted revenue that
may cause us to be below our net revenue and operating margin expectations for a particular period of time and therefore adversely affect our stock
price. For example, many of our competitors in the service provider space aggressively price their products in order to gain market share. We may
not be able to match the lower prices offered by our competitors. Many of the service provider customers will seek to purchase from the lowest cost
provider, notwithstanding that our products may be higher quality or our products were previously validated for use on their proprietary network.
Accordingly, we may lose customers who have lower, more aggressive pricing and our revenues may be reduced. In addition, service providers may
choose to prioritize the implementation of other technologies or the roll out of other services than home networking. Weakness in orders from this
industry could have a material adverse effect on our business, operating results, and financial condition. We have seen slowdowns in capital
expenditures by certain of our service provider customers in the past, and believe there may be potential for similar slowdowns in the future. For
example, service provider purchases decreased in the third quarter of 2012 following a run-
up in service provider purchases in the first half of 2012,
including purchases in anticipation of coverage relating to the 2012 Olympic games. Any slowdown in the general economy, over supply,
consolidation among service providers, regulatory developments and constraint on capital expenditures could result in reduced demand from service
providers and therefore adversely affect our sales to them. If we do not successfully overcome these challenges, we will not be able to profitably
grow our service provider sales channel and our growth will be slowed.
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